The original principle of micro lending is to provide start-up or expansion business loans to people living in less advantaged or impoverished countries who are unable to apply for traditional loans due to lack of credit history and/or collateral. Micro-financing is a great tool to create venture capital for those who would have no other means to secure it. The primary goal of micro lending, as established by Muhammad Yunus, the godfather of microcredit, is to eliminate poverty by means of giving all the opportunity to be self-sustaining with long term solutions.
The principle of micro financing is the mutual benefit of relationship between microfinance institutions and the improverished, however one must note that there is a distinct difference in the for-profit and not-for-profit lenders moral standing when regarding profits. For-profit micro lenders maxmize shareholder wealth while non-profits use the profit to grant more micro-loans. Here is where the ethical dilemma lies not in the principle of micro-financing, but rather in the implementation, operations and profit distribution of for-profit micro-financing. Does for-profit micro lending widen the socioeconomic distribution among communities? Is it ethical to charge the least advantaged high interest rates, when they are the most in need of the loans?
The theoretical principle of Utilitarianism a form of Consequentialism, asks society to maximize the good of the whole and states that the action is determined by the outcome. If we first look at the outcome of for-profit micro lending, we see that the high rate makes it more difficult for people to pay back the loan. For-profits generally charge a higher interest rate for loans and claim that it is because the risk is higher, however the microcredit loan repayment is 95-97%, with only a 3-5% default rate. A side-to-side comparision of two of Mexico’s top micro-financing instituions show that for-proit companies could be charging much lower rates. Compartamos, a for-profit company is charging upwards of 100 percet per annium on there loans while Al Sol, a non profit firm, is charging half of that of Compartamos while their retained profits from there borrowers both hover around 41% (Mix Market).This leads one to question the morality, authenticity, and ethics of the high risk rate when the default rate for these loans is so low.
As a result of for-profit micro lenders charging exorbitant interest rates, one could say that this is not maximizing the utility of the whole, but rather holding society back. If we, as a community, are able to aid the least advantaged and level socioeconomic standing on a global scale, we could potentially eliminate tax dollars that would be used for charity and non-profits. With less money being spent on aid to individuals because those individuals are able to take their micro loans, develop businesses and be self sufficient, we would be maximizing utility and all of humanity would benefit.
For profit micro lending profit is used to benefit the shareholders, while non-profits use profit to reinvest in their company and grant new loans. Based on this we can deduce that for-profit micro lending is unethical because it does not maximize the net gain or profit to benefit the whole but only rather benefit the shareholders wealth. It could be said that unlike for-profit micro lending, non for-profit micro lending is Pareto Superior because it in itself is not causing harm to anyone. Government subsidizes are allocated based on regulations, people who donate to the non-profits do so of their free will and recipients have the capability to better their living situation. Non-profit micro credit will benefit the whole of humanity because it assumes that if it can help all, all will be able to have income and poverty will cease to exist.
Rule Utility states that an “action is ethical if and only if the action would be...